Tag : community debt

Any debts incurred during the marriage are presumed to be debts of the community. Any debts incurred prior to marriage are the separate debts of the party who incurred them. However, the party trying to argue a debt should be separate would need to prove the debt existed prior to marriage to prove its separate nature.

The only way a debt incurred during the marriage can be confirmed as a separate debt would be if there was a written agreement for the creditor to look only to the separate estate of the party, not to the community estate. One spouse applying for the credit individually is not the same as the creditor agreeing only to look to her separate estate for payment.

The court will divide debts as part of a “just and right” division of the entire community estate. However, the court does not have the ability to influence a third party creditor. Even if the court awarded a debt to a certain party, the creditor would look to the person whose name is on the debt to pay it (regardless of who the court ordered to pay it in a divorce decree). Normally debts are either paid off with available assets or proceeds from the sale of property or the person whose name the debt is in takes it (but is often compensated with additional property to make up for it).

The court will look at the following factors when determining how to allocate debt in a manner that is “just and right”: (1) the spouse’s ability to pay; (2) the property securing the debt (if a party takes the property security the debt, that party takes the debt); (3) the relationship to the creditor (if wife borrows from wife’s family, she’ll end up with that debt); and (4) the party responsible for creating the debt.

It is extremely common for clients to have concerns about credit card debt the other party has accumulated. If the charges on the credit card are for ordinary living expenses, those will definitely be considered community debts and will very likely divided 50/50. (This doesn’t mean each is paying half of the credit card bill, it just means we are factoring in a 50/50 split of the debt into the division of the estate.) If the wife is buying gifts for her boyfriend on the card, then she is most likely going to get hit with that debt. If the husband is just a spender, it’s most likely going to be divided 50/50. If someone is doing really insane, crazy spending, then they may end up taking a bigger portion of the debt.

Student loans will almost always go with the person who received the education tied to the student loans. Secured debts generally go with the property to which they are secured. For example, if the parties have a car with a loan, the spouse who takes the car will take the loan. If that loan is in both parties’ names (or the name of the spouse not taking the car), the spouse taking the car will generally have to refinance into his or her own name within a certain amount of time. If he or she cannot do that, then the car usually must be traded in or sold.

Lately I have seen a large number of divorcing couples who have kept their bank accounts and debts completely separate all throughout their marriage. Does that mean those accounts are separate property and the debts will go to the person whose name is on the debt? No.

In general, any property accumulated during the marriage is community property, regardless of whose name is on the account or the title. Any property owned by either spouse prior to the marriage is the separate property of that spouse. Therefore, if the couple buys a house together prior to marriage and it is in only one spouse’s name, it is technically the separate property of that spouse. (There are ways for the other spouse to get access to some money from the house, but that is another topic for another day.) Inheritance is also considered separate property, as are gifts. If it does not fall into one of those categories of separate property, it is community property.

I do not recommend keeping your financial life separate from your spouse’s financial life, at least without full knowledge of what is going on with your significant other. You could be help responsible for a portion of your spouse’s debt, even if it was in his or her name alone and even if it was frivolous spending. Proving that the parties had an agreement to keep everything separate and to each be responsible for his or her own debts (or to each keep his or her own property) is difficult unless such an agreement is in writing. The spouse in the weaker financial position will undoubtedly be looking to equalize in the event of a divorce.

Just like with property, debt must be characterized as either separate or community debt. Any debt incurred by one of the spouses before the marriage is separate, and that spouse will be responsible for paying that debt. Any debt entered into by either spouse during the marriage is presumed to be community debt. A party can overcome the presumption by establishing that the creditor considered only the separate estate of one spouse for satisfaction of the debt.

Once debt is characterized, the division of debt will be a factor in a “just and right division” of the community estate. The court can consider several factors when determining which spouse to award a debt: (1) the spouse’s ability to pay; (2) which party was awarded the property securing the debt; (3) the spouse’s relationship to the creditor; and (4) which party was responsible for the debt. Based on these factors, one party may end up taking on significantly more debt than the other. This is especially true if one spouse keeps the marital residence and then takes on the mortgage.

Most divorces settle, and any settlement would include division of debts. When the case does not settle, the court can deal with debts in a few different ways. One, the court can order the parties to sell certain assets to pay off the liabilities. This often occurs when neither side can afford the mortgage on the marital residence on his or her own. Two, the court can order one side to pay for a particular debt. Finally, the court can order that the parties are jointly liable for a debt. This is usually the least desirable outcome, as one spouse’s credit can be negatively impacted by the other spouse’s failure to pay.